COFCO Imports Expertise In Tie-Up With KKR, Baring

COFCO Meat joins hands with KKR, Baring

China’s campaign to clean up its fragmented and scandal-plagued food industry has gotten a boost on the meat front, with word of a new tie-up between national grains giant COFCO and global private equity giants KKR and Baring Private Equity Asia. This latest move is part of Beijing’s growing effort to bring in foreign expertise to create a handful of major food groups that can ensure product quality and food safety. Unfortunately, nearly all the major giants now emerging are big state-run companies, meaning most of these firms are likely to be quite bureaucratic and most won’t be available to foreign stock buyers.

Still, it’s quite possible that some or all of these newly emerging good giants could make public floats at some point in the future, and that Beijing could ultimately privatize them completely to try and make them more efficient and globally competitive. The industry probably isn’t ready for such privatizations just yet anyhow, as reflected by the recent failure of an initial public offering by WH Group, formerly known as Shuanghui, which is one of the nation’s emerging giants in the pork processing arena.

The latest big development on the food front will see KKR, Baring and Chinese private equity firms Boyu Capital and HOPU, all become strategic investors in COFCO Meat, the meat processing arm of China’s largest grain company. (company announcement; Chinese article) The announcement contains no detail about the size of the investment or nature of the partnership, but I expect that all 4 new partners will invest tens or even hundreds of millions of dollars in exchange for 3-10 percent stakes in COFCO Meat.

Founded in 2009, COFCO Meat is a relatively new company which was formed right as a series of food safety scandals was beginning to take shape in China due largely to inexperience and lax quality controls at most firms. The new partnership makes no secret of the fact that improving food safety is at the center of COFCO’s plans, with the words “safe” and “safety” mentioned more than 10 times in the space of an otherwise relatively short announcement.

As to the partners, KKR has previous experience in China’s food industry, following its earlier investment in China Modern Dairy (HKEx: 1117), which now counts domestic dairy giant Mengniu (HKEx: 2319) as one of its largest stakeholders. Boyu and HOPU are both also well-connected domestic private equity firms, meaning they can help COFCO cut through red tape to help it improve its operations.

With these major new partners on board, I wouldn’t be surprised to see COFCO Meat attempt 1 or 2 major global purchases over the next couple of years, similar to what some of China’s other emerging food giants have done. WH Group was in the headlines last year after it purchased leading US pork producer Smithfield, in the biggest acquisition of a US company by Chinese firm. WH attempted to list in Hong Kong in April to raise funds to repay some of its debt from that deal, but ultimately scrapped the plan due to lack of investor appetite. (previous post)

Other emerging Chinese food giants include Shanghai-based Bright Food, which has made a number of major global purchases over the last 3 years and is now in the process of trying to buy leading Israeli dairy Tnuva. (previous post) Mengniu is also emerging as a company to watch, and last year imported its own foreign expertise through a major tie-up with French food giant Danone (Paris: DANO). (previous post) Look for more similar tie-ups and acquisitions in the next 2 years, as a new field of major, more experienced food companies slowly emerges in the scandal-plagued space.

Bottom line: COFCO’s new partnership with KKR and Baring Private Equity is the latest step in Beijing’s clean-up of the scandal-plagued food space, with more similar tie-ups and global M&A likely in the next 2 years.

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